The VIX curve did The Twist (cue Chuck Berry) as spot VIX rose 8% and the front month October contract was up by just over 1%. Beyond the front month all things were red.

The highest closing level for VIX last week came on Monday with the spot index finishing the day at 14.50. One trader had an expectation that this move up would very short lived and decided to sell a call spread with VIX Weeklys Options that expired on the open this past Wednesday. Just a few minutes before the close there was a seller of the VIX Sep 28th 13.50 Calls at 1.17 who bought VIX Sep 28th 15.00 Calls 0.42 for a net credit of 0.75. The payout diagram below assumes the trade was held through Wednesday settlement.

For those that are aware that the corresponding VIX futures pricing comes into play with respect to VIX options pricing I’ll add that the Sep 28th VIX Future closed last Monday at 14.60, basically in line with spot VIX. The risk reward of this trade was a gain of 0.75 or a loss of 0.75 with the break-even at 14.25. I highlighted Wednesday’s VIX settlement on the payoff diagram below which was safely below the short strike of 13.50 in this trade at 13.05.

SEPT. 21, 2016 – Wilshire Associates recently was ranked as one of the world’s ten largest investment consultants, due to the fact that it had more than $1 trillion in worldwide institutional assets under advisement, according to the survey published in the Nov. 30, 2015 issue of Pensions & Investments.

Wilshire Analytics analyzed the performance of several indexes over a period of 30 years, from June 30, 1986 through June 30, 2016, including five indexes that sell and/or buy options on the S&P 500® (SPX) Index:

CBOE S&P 500 BuyWrite Index (BXM)

CBOE S&P 500 30-Delta BuyWrite Index (BXMD)

CBOE S&P 500 Zero-Cost Put Spread Collar Index (CLLZ)

CBOE S&P 500 5% Put Protection Index (PPUT)

CBOE S&P 500 PutWrite Index (PUT)

The performance of these indexes was compared with certain other key stock, bond and commodity indexes that represent asset classes typically found in the investment portfolios of institutions and individual investors.

KEY FINDINGS

Key findings of the 30-year study include:

Higher Absolute and Risk-Adjusted Returns: Two indexes that sold SPX options every month to collect option premium income – PUT and BXMD – both had higher absolute returns and higher risk-adjusted returns than the other indexes studied.

Lower Volatility: Each of the five option-based indexes had lower volatility than all the other indexes included in the study, other than the fixed-income index.

Less Downside Risk: The maximum drawdown for the options-based indexes was 24 percent lower, on average, than for the S&P 500 Index.

Market Capacity and Liquidity: The notional value of SPX options’ average daily volume grew significantly over the last 10 years; it was more than $200 billion for the 12 months ended June 2016, the most recent year studied.

As shown in the first charts below, over the three-decade period, the option-selling indexes (BXMD, PUT and BXM) all had higher returns than the option-buying index (PPUT) and the MSCI EAFE and S&P GSCI indexes. Index option-selling indexes can benefit from the fact that the implied volatility usually has exceeded realized volatility, as is shown in Exhibit 8 of the study.

EFFICIENT FRONTIER

The five options-based indexes are shown in the triangle symbols on the Efficient Frontier chart.

NEW HEAT MAP

A new “heat map” uses color coding to rank returns across asset class by year (within each column).

Over the past 15 years, option-writing strategies, particularly the BXMD and PUT strategies, typically had above-average returns and were rarely among the lower-performing asset classes. Other asset classes were occasionally top performers but also were ranked at or near the bottom more than once. Past performance is not predictive of future returns. Sources: Bloomberg, CBOE, St. Louis Federal Reserve Bank and Wilshire Associates.

$200 BILLION IN AVERAGE DAILY NOTIONAL VOLUME FOR SPX OPTIONS

After hearing about the strong performance of certain CBOE benchmark indexes, institutional investors often ask me about market capacity for SPX options. The study presents a chart that shows that the estimated notional value of average daily volume in SPX options grew to more than $200 billion in the last 12 months studied.

The streak of SPX doldrums came to an end on Friday with the orderly drop of over 50 points for which resulted in VIX rising to 17.50. Everything worth noting happened on Friday which may have added to the angst that resulted in the S&P 500 closing near the daily lows and VIX closing near the daily highs.

Early Friday when VIX was at 13.93 and the big move was just getting started there was a split strike trade that came into the pit. With the October future at 16.35 a trader sold over 12,000 VIX Oct 13.50 Puts for 0.31 and then purchased the same number of VIX Oct 25 Calls for 0.64 and a net cost of 0.33. The payout shows up below.

As noted at the beginning of this blog the October VIX contract settled at 17.875 or over 1.50 higher than when this trade was executed. This led me to check closing prices for the two options in this spread. The 13.50 Puts could be repurchased for 0.35 and the 25.00 Calls sold at 1.00. Therefore, the spread that cost 0.33 to enter finished the day at 0.65 or a penny under a double.

VXST more than doubled as a function of the index being depressed in front of the three-day weekend and then in reaction to Friday’s SPX sell off. As would be expected, the rest of the VXST-VIX-VXV-VXMT curve moved higher as well, but outside of VXST relative to VIX we are still in a state of contango.

The 2.39% drop in the S&P 500 all came from Friday’s price action as did just about everything else on the table below. Note that VXX rose 11% and UVXY gained over 22%, both doing what they were designed to do, allow traders the ability to benefit from quick spikes in volatility.

Despite the great week for VXX and UVYX both funds are still much lower on the year. This time last week, SVXY YTD performance was up over 50% now the fund’s return stands at just over 31%.

As expected the leaders among the volatility indexes were related to broad based market indexes. The VVIX move to over 110% is worth noting since that index has a relatively high levels for most of 2016 when compared to the historical range. I did find it interesting that the only three indexes that lost value last week were currency related.

VIX finished the week just under 12. We can attribute this to a combination of the equity market being pleased by Friday’s August Non-Farm Payroll report along with the three-day weekend effect. Note the September futures, which settle on the 21st moved lower, but held up a bit relative to spot VIX. This is common regardless of the directional move out of the index, but is accentuated whenever we have a long weekend.

Despite there only being one trading day (and an overnight) left until expiration, over 30,000 Sept 7th VIX options traded on Friday. Almost 1/3rd of that volume was focused on the VIX Sep 7th 13 Calls. Early in the day someone chose to sell these calls for 0.45 in several lots. This transaction did not appear to be part of a spread trade so I’m going with the payoff diagram below as a depiction of how this may work out on the open Wednesday.

Later in the day there was a sale of 3000 VIX Sep 7th 13 Calls down at 0.32. I investigated a little and this appears to be part of a spread that also put on a bear call spread. In addition to the previously mentioned transaction, the trader also sold 3000 of the VIX Oct 19th 13 Calls at 3.54 and then completed the spread by purchasing the VIX Oct 19th 20 Calls for 1.08. I’m going to do my best to keep an eye out for more 3000 lot sales of short dated VIX 13 strike call options to see if this is the beginning of a progressive trade.

The VXST – VIX – VXV – VXMT curve does what it normally does on a pre three-day weekend week and got steeper. It’s been a while since I ran the numbers but I’m fairly certain VXST almost always drops before a holiday weekend and then rebounds when we all return to work refreshed and ready to trade.

SKEW below 130 was the first thing that stood out to me on the table below. A quick check and I saw that it had been consistently higher than 130 for the better part of August despite the 2016 average being close to 128. Although at the lower end of this year’s range, VVIX at 81 is relatively high considering VIX finished the week below 12.

With VIX moving lower last week and the futures following the spot index lower the long ETPs had a rough week. What’s bad for VXX and UVXY is good for SVXY which surpassed the 50% performance line for 2016.

Looking across the range of volatility indexes you can see that most markets experienced an implied volatility drop. The outlier was OVX which rose 7% last week. If you are ever trying to find where there may be higher volatility the table below is taken directly from www.cboe.com/volatiltiy

When we see high commodity market implied volatility I always take things to the next step and check out the skew chart from my LiveVol pro platform. Below is a chart of the option skew for October 7th USO options which is the market used to calculated OVX. The underlying finished the week at 10.24 and I think it’s pretty obvious that implied volatility is higher on the downside than the upside.

On Thursday, September 22 at 2:00 p.m. E.T., S&P Dow Jones Indices and CBOE will co-host a complimentary webinar for financial professionals on the topic of — How are Institutional Investors Using VIX®? Financial professionals who wish to register and see more information are welcome to visit this link — http://bit.ly/VIX-Sep22.

The panel will cover:

An introduction to the VIX index, its related tradable products, and its historical performance relative to the S&P 500

Using VIX Index products as the basis for pure-play volatility strategies to manage risk, extract yield, or diversify portfolios

First-hand experiences and case studies from asset owners and managers who use VIX Index products in their portfolios as a means to mitigate risk while capturing returns

You are welcome to submit your questions during the live Q&A session following the webinar.

**********

In several recent news clips financial professionals have comments on the possibility that the VIX Index might rise in coming months with possible interest rate changes and the U.S. presidential election.

This chart shows recent prices for the VIX Index and for select VIX futures; note that while the price for the VIX Index was 14.07, the price for the VIX future with the November 16 expiration was 17.85. During the webinar the institutional investors will discuss the pricing for VIX futures and options, and how these products are used in portfolio management.

Financial professionals who wish to register and see more information are welcome to visit this link — http://bit.ly/VIX-Sep22.

For the second week in a row the S&P 500 Index related volatility indexes hardly budged. Three out of four were lower with the longest dated, VXMT, up slightly on the week.

We’ve ranted and raved in various forums about how VVIX has been holding up despite a lower VIX. It was kind of like the last holdout for higher equity market related volatility until this past week when it took a 12% dive. This puts VVIX closer to the lower end of the historical range. I guess we will now focus on SKEW which is the sole index that remains relatively high.

Since the equity market bottomed in February both VXX and UVXY have given back all the early 2016 gains and then some. As long as contango prevails in the VIX futures term structure and VIX remains low we will probably continue to see SVXY widen the 2016 lead on the long funds.

I’ve started looking beyond broad based equity market volatility in this space. This week the biggest moves to the upside came from the currency focused volatility indexes. If something is getting ready to upset the financial markets maybe it is macro in nature and the heightened risk is showing up in $BPVIX, $JYVIX, and $EUVIX.

Finally, on Friday the CBOE Options Institute held the first of a series of focus classes. We spent the day covering all things VIX and Volatility with a great group of students. I actually like these sorts of classes because I always seem to come away with new things to work on based on student questions or comments.

One student noted that he likes to buy SVXY on any pull back of about 20% and this prompted another student to ask if he’d ever considered selling out of the money puts on SVXY. We fired up LiveVol Pro and took a look at the skew of SVXY options. A condensed version of that chart appears below showing the skew for SVYX options expiring on September 16th.

SVXY finished the week at 73.44 and we kicked around different 60 strike SVXY puts. The skew chart above shows the IV for September 16th SVXY 60 Puts is around 80%. With volatility like that priced into options we looked at the bid side for all the 60 strike puts expiring in September. With Weeklys there are actually five alternatives to consider.

The premiums ranged from 0.35 for the September 2nd puts to 2.05 for the September 30th contracts. Of course this is the equivalent of being short volatility since a volatility spike can take 20% out of SVXY in just a day, but if a trader would be a willing buyer of SVXY on a dip to 60.00 the opportunity to get paid to do so exists since the IV is so high for out of the money puts on this ETF.

VIX dropped a little as the equity market did a whole lot of nothing last week. We retired the August contract on the open Wednesday morning and September took over as the front month. With time to go to expiration (this is actually a five-week cycle) everyone seemed to notice the steep contango again. What is interesting below is the behavior of the curve beyond October. November and beyond gained a little ground despite all the contracts moving up in the pecking order of expirations.

At least one trader decided that there is a possibility of higher volatility over the next few weeks. In a rarity there was a fairly large out of the money call buyer in the market early Friday. With VIX a tad over 12.00 a trader purchased 60,000 VIX Sep 25 Calls in three lots paying 0.29. The September VIX futures contract was trading at 14.80 when this trade came into the pit as well.

VIX has spent the whole of August below 14, and remains – at time of writing – close to its lowest levels in two years. But the present calm may be dependent on a short-term seasonal effect; and we are approaching the traditional period where it ends.

August is traditionally a quiet month for U.S. equities. The usual deluge of corporate announcements, elections, and product launches attenuates to a trickle, while traders and investors decamp to their holiday destinations. Then, in September and throughout October, the world returns to business, sometimes only then announcing or processing events that may have occurred over the summer.

The lack of news flow in August and subsequent ramp-up creates a seasonal effect in volatility, with VIX depressed over the summer months and rising through late August and early September.

The graph below shows the historical extent of such seasonality, plotting the average level of VIX in comparison to its one year trailing average at each point in the year. The effect is not dominated by one or two outlier events, but instead appears persistent; the grey shaded area shows a similar pattern for the 25% and 75% percentile range of values. Today’s value is well below the historical interquartile range as VIX is 30% below its average level for the past year.

Interestingly, there is a clear seasonal lull between late June and early August, and a significant increase towards the end of August. The 35th week of the year showed, on average, the biggest rise in volatility. Given that we are presently approaching the end of the 34th week of 2016, investors might wish to bear this history in mind.